Are You Paying the Correct Tax on Your Health Spending Account?
One of the most common mistakes we see with Health Spending Accounts (HSAs) in Ontario is incorrect tax treatment.
At a glance, everything looks fine. The plan is set up, claims are being reimbursed, and the business is deducting the expense.
But behind the scenes, the required tax isn’t always being handled properly.
And when that happens, the responsibility doesn’t fall on the provider. It falls on the employer.
What’s the Issue?
Under Ontario legislation, benefits plans are subject to 8% Retail Sales Tax (RST).
A Health Spending Account (HSA), structured as a Private Health Services Plan (PHSP), falls under this definition.
READ: Top 20 Eligible Health Spending Account (HSA) Expenses Most Canadians Don’t Know About
For most HSAs (which are structured as unfunded plans), this means:
- RST applies to the claim amount when benefits are paid
In addition, there is also:
- 2% Insurance Premium Tax, typically applied to both the claim and administration costs
If this tax isn’t collected by the Third-Party Administrator (TPA), the employer is still responsible to:
- Self-assess the tax
- Remit it to the Ministry of Finance
Why This Matters
This isn’t just a technical detail.
If the plan isn’t administered properly, it can create:
- Compliance issues
- Unexpected tax liabilities
- Potential challenges to the deductibility of the expense
In other words, what’s supposed to be a very efficient strategy can become messy if it’s not set up correctly.
Where the Confusion Comes From
Not all TPAs handle this the same way.
Some collect and remit the tax properly. Others don’t.
That’s where the confusion comes in—because from the client’s perspective, everything looks identical.
Until it isn’t.
What the Ministry of Finance Says
The Ontario Ministry of Finance has clarified that:
- PHSPs are considered benefits plans
- RST applies depending on how the plan is structured
- For unfunded plans, RST applies to claims paid
- If tax isn’t charged, the employer must self-assess and remit it
If you want to review the legislation directly, you can find it here:
https://www.ontario.ca/laws/statute/90r31#BK6
Does the Tax Reduce the Benefit of an HSA?
This is a fair question—and one we get often.
Even after factoring in:
- 8% RST
- 2% Insurance Premium Tax
- Admin fees
- HST
An HSA can still provide a significant advantage.
Even After Tax, the HSA Still Wins
| Without HSA | With HSA | |
| Medical Expense | $1,000 | $1,000 |
| Corporate Cost | $2,151.93 | $1,215 |
| Taxes / Fees | $1,151.93 | $215 |
| Net to You | $1,000 | $1,000 |
Total Corporate Savings:
$936.93
Assumes a 53.53% marginal tax rate. To net $1,000 personally, the corporation needs to earn $2,151.93.
The Key Difference
You’re not eliminating tax—you’re changing the type of tax you pay.
Instead of paying personal income tax at 53.53%, you’re paying:
- Admin costs
- Insurance-related taxes
That’s why the strategy still works.
Common Mistakes We See
This is where most issues come up.
- Assuming no tax applies
Some plans are set up without charging RST or insurance premium tax at all.
The obligation doesn’t disappear—the employer is still responsible.
- Thinking all TPAs handle this the same
They don’t.
Some properly structure and administer the plan. Others don’t apply the tax correctly or consistently.
- Confusing funded vs. unfunded plans
This matters.
- Funded plans → RST applies to contributions
- Unfunded plans (most HSAs) → RST applies to claims
If this isn’t understood, tax can be applied incorrectly.
- Ignoring the Insurance Premium Tax
The 2% tax is often overlooked entirely.
But it still applies—and should be factored into the total cost.
- Focusing only on fees, not the net result
We often hear:
“Why would I pay admin fees and taxes on my claims?”
Because even after all costs, the HSA still produces a meaningful net savings.
The Takeaway
An HSA is still one of the most effective tools available for business owners.
But like anything involving tax, the structure and administration matter.
The issue isn’t whether tax applies.
It’s whether it’s being handled correctly.
If you’re currently using an HSA – or considering one – it’s worth confirming that everything is set up properly on the back end.
Happy to take a look or coordinate with your accountant if that’s helpful.
– Jeff
*Disclaimer: This article is intended for general informational and educational purposes only and does not constitute personalized insurance, financial, legal, or tax advice. Insurance needs, policy features, costs, and suitability vary based on individual circumstances and specific contract provisions. Coverage availability and terms are subject to insurer underwriting and approval. Readers should review their own situation carefully and consult with a licensed insurance advisor before making any insurance decisions or changes to existing coverage.